Monthly Archives: July 2014

What’s the Value?

Unless a business valuation is required by agreement (as in the case of a buy-sell) or by law (such as when a gift is made by a business owner to his/her child) where its necessity is obvious, I am often asked why a business valuation is so important. Business owners often believe that they can determine the value of a business by merely applying a multiple of revenue, net income, EBITDA or some other industry standard. Such generalizations often swing and miss at the true value, not only when it is needed for purposes already mentioned but also when negotiating a value, such as when buying or selling an interest in a business or determining its value for settlement of marital assets in a divorce.

So why do these simple calculations miss the boat on determining value? Here are just a few reasons:

· Business owners often rely on historical information instead of applying potential future growth rates. If a product or service is expected to trend toward higher or lower growth or profitability, a value can be greatly skewed by ignoring this forecast, which valuations based upon multiples do.
· The market place has a mind of its own and, like it or not, information about private transactions are publicized and affects the perceived as well as the actual value. The buyer or seller of a business, the working spouse and soon-to-be ex-spouse, and even the IRS, have access to this information and will use it when calculating their own value. Therefore, market data cannot be ignored but often impacts value to the extent that it lands far from the results of simplified calculations.
· One size does not fit all when it comes to valuing a business and the associated risks may be substantial. Factors such as the size and depth of a management team, the availability and reliability of financial information, the amount and severity of competition, the position within the industry and its stability, all individually and collectively affect the risk of ownership and, therefore, the value of a business interest. The weight of each of these factors, and many more, are considered in a valuation but are not included in the use of basic multiples.
· If a transaction involves less than a controlling interest in the business, doesn’t it make sense that it’s worth less than an interest that provides control? This control provides the owner with the ability to make management decisions affecting the future of the business, compensation, distributions, etc. A lack of control prevents an owner from such decisions. Typical calculations cannot incorporate such differences in control into determined value.
When preparing a valuation, all of these factors (and more) are considered and often pulled into the calculation – future growth rates, market data, company risks, and the lack or presence of control. When comparing the sophistication of utilizing numerous factors in a professional valuation versus the oversimplification of using a multiple to determine value, it is easy to see why the outcome may be drastically different and why the cost of swinging and missing may be huge.

If you want further information about why a business valuation would be important in your particular situation, feel free to contact me, sfultonberg@gkgcpa.com

– Steve Fultonberg, Partner, CPA, CVA

Divorce – A financial and emotional journey

Lately, I have been noticing with more frequency, the amount of increased stress the legal and financial aspects of divorce have placed not only on the divorce process itself but more disturbingly on post-divorce life.

It is true that the majority of divorces are settled or mediated with the parties living up to their respective legal and financial obligations, never having to see a lawyer or courtroom again once the divorce is finalized, maintaining stress is at a minimum. However, for many, the stress levels post-divorce are the same or greater than they were while married. This is due to the rise in ex-husbands or ex-wives not living up to the financial obligations they had committed to as part of the divorce settlement or mediation agreement.

Some of this is caused by anger, spite, resentment, complete disregard for the legal settlement or changes in that financial situation of the obligated party. Once these divorce obligations to the ex-spouse are not met the stress level between parties elevates at an alarming pace and tensions develop between them. It then trickles down to the children and all of a sudden even post-divorce the family is in turmoil once again. Of course once the party receiving alimony and/or child support stops receiving payments and gets no cooperation from their ex-spouse, that’s when attorneys get back involved and the legal warfare begins again.

Heaps of motions get filed with the courts, appearance dates get set and changed, parties switch attorneys, payments don’t get made, tempers rise, accusations are flying and loads of money gets spent on attorneys and courts that could have been used to pay the spousal obligations. The matrimonial court systems in New York and New Jersey seem ill equipped to handle these matters in a sympathetic or timely manner. Most of the presiding Judges are rotated in and out of matrimonial court positions frequently, so decisions made by these Judges are then left to be enforced by a different Judge with no historical familiarity with the matter. Cases and motions drag on for months, sometimes years while no payments are being made. The spouse who is entitled to support and their children suffer financially and emotionally. While this legal wrangling perpetuates endlessly, the spouse who is entitled to support and their children suffer financially and emotionally and the non-paying spouse faces potential jail time.

When spouses sign the settlement, separation or mediation agreement it should be done with the intent to live up to the obligations they have agreed to. In order to avoid situations discussed above, neither spouse should agree to things that they know they can’t live up to in the future. It is for this reason, having a CPA who is experienced in divorce settlements, valuations, etc. is as crucial as having a sharp divorce attorney. Yes, circumstances change and both parties have to be willing to adapt to those changes whether they are negative or positive. However, obligations of a divorce settlement are not weapons to be used to cause pain and harm to ex-spouses but rather they should be the guidelines and vehicles for each party to be able to move forward in their post-divorce life.

– Scott Goldstein, Partner
scottg@gkgcpa.com

“The Smart Ones:” How to make money in a down economy

-I am often asked “how are your clients fairing in this economy…. Any of them making money?
My answer is always… “Yes, most of them are actually, the smart ones are definitely making money”. So who are the smart ones they ask?

Those that watch their overhead carefully and keep their costs in check even when enjoying a great year. My most successful clients have kept their overhead down even during good times when the urge to upgrade the facility, add some additional personnel, lease that new luxury sports car you’ve had your eye on, are all very tempting for sure. Some moves, of course, become necessary as a business grows, but the smart ones can make the right choices between things the business really needs to grow and things that might be nice to have. Don’t make long term commitments based on short term sales spikes.

Those that watch their sales backlog very carefully and know whether they should be ramping up or pulling back. Business runs in cycles. Even the best run companies are going to have their slumps. The smart ones know that sales backlog is a key indicator in what lies ahead and they have a good system for tracking it. When that number starts to drop off the smart ones know what moves they have to make to keep expenses from getting ahead of revenues.

Those that invest in a great management team and surround themselves with good people. Jim Collins’ classic book on business “Good to Great” put forth a concept that we practice here at our firm, that is go out and get the right people on the bus. Once you’ve got the right people you can make sure that you’ve got everyone in the right seat. Lastly you figure out exactly where you want to drive the bus. But, with the right people on board, you can go almost anywhere you want to.

Those that stick to what works best. Many successful businesses are not glitzy or glamorous but stick with a reliable business model that has withstood the test of time. Walk into any hardware store and you’ll still find an aisle filled with nuts, bolts, screws, fasteners and nails. There may be modern methodologies for making these products but the products themselves have stood the test of time. The demand has never gone away.

Those that stay on top of technology trends and gain efficiency. There are still only two ways to make more money in business, increase sales or reduce expenses. The global market has gotten more competitive and increasing sales isn’t always easy to do, but the smart ones find ways to reduce costs through use of modern, efficient technologies. Industry conferences, trade shows and industry publications are just a few of the ways to stay up on what’s out there that can help you shave your cost per unit and increase your margins.

I have been fortunate to have met and served many successful entrepreneurs over the years, including more than my share of smart ones. My firm, GKG CPAs is the proverbial “bus” filled with the right people in the correct seats, always heading in the precise direction of success for our clients and our company.

-Don Karlewicz, Managing Partner
dkarlewicz@gkgcpa.com